May 2008

I recently compared this mess to a clogged drain. All of the water was backing-up and until the clog is removed nothing would run smoothly. The facilities that the Fed has established appear to be working. Much to the surprise of some writers who, in magazines such as Fortune, suggested the Fed was loosing its “Mojo.” If we take a look at the markets, we are starting to see that the end is in sight. It isn’t here yet, but there is reason to be hopeful.

Let me site a few examples to illustrate what I have seen recently. On April 11 General Electric posted poor earnings, just weeks after CEO, Jeffrey Immelt, had assured the markets that they were going to be fine. The market sold off and closed down over 256 points. That should have been enough to bring on some extended selling, right? Wrong! By the following Wednesday the stock market was back up over its pre-GE announcement. Does that tell us anything? That alone doesn’t, but couple that with an announcement that housing starts fell 11.9 percent to a 17 year low, and the Fed’s “beige -book” (actually named for the color of the book) which described the current economy and it did not mince words. Some of the descriptions go like this: The Federal Reserve Bank of New York stated, “the region’s economy has shown further signs of weakening.” The Federal Reserve Bank of Philadelphia added, “Business activity in the region appeared to soften further in March.” In addition, the Federal Reserve Bank of San Francisco commented, “Sales at retailers weakened further and demand growth for services continued to slow, and housing demand remained exceptionally weak.”

This is not exactly the type of announcements that would normally be associated with a rally in the stock market or a sell-off in the treasury market, but that is exactly what occurred. In addition the futures market priced in an 80 percent chance the reduction in the overnight federal funds rate will be 25 basis points bringing the rate down to 2.0 percent. The futures market had been predicting a 50/50 chance of either a 25 or a 50 basis point reduction. So what has happened? I believe the amount of monetary stimulus and the soon to be mailed fiscal stimulus packages are finally getting some respect.

On a recent conference call I conducted April 9, I drew attention to the fact that in the United States alone, there is $5 Trillion in cash or cash like accounts currently available. Of that, $3.5 trillion is in money market accounts. Some of the total of $5 trillion, I am sure, is in your credit unions share accounts. If we are lucky, this money will be invested, out longer-term, and in a very orderly fashion. In my humble opinion, I believe we have the potential for a full-fledged rally, at least in the stock market, the likes of which we haven’t seen in a very long time, if ever. I do not believe a rally will take place in the treasury market, because it is over-priced, as a result of the flight to quality. As a matter of fact, buyers have already begun to sell their treasury holdings and buy other asset classes. That news is also good for us because investors will be looking for safe and sound places to put their money; someplace with an attractive yield such as a longer-term certificate in your credit union. Your friendly competitor down the street, the local bank, will also be vying for this money. However, there should be plenty to go around.

As I said at the end of last month’s FYI, it is just a matter of time. Don’t get me wrong; this crisis is not over. I can see, however, several signs that point in the right direction. Fear is not something that goes away immediately. Spring is coming and so is a new beginning to this unfortunate chapter in our country’s history.